The original BSD (before about the middle 90s) was not at all free. It could not be distributed without the user also getting an AT&T / Bell Labs license for the underlying Unix.
And until the early 90s, nobody thought about the concept of free software. Some software was commercial and sold. Some required filling out license paperwork, but didn't require payment. Other software was intended to be freely shareable. People did not make a big deal about that. I started using computers in the late 70s, and back then there was lots of software that was intended to be freely distributed.
Commercial software, with interestingly complex licenses, has existed since at least the 1950s. Free software, with an explicit license that says "copyright by X, feel free to distribute this freely" has existed at least since the 60s.
No, that existed long before Microsoft. While a lot of software in the 50s and 60s was distributed together with the source code, there was also lots of software long before microsoft that was also distributed only in binary form. For example, most mainframe software other than the OS was NOT shipped with source code; for a long time, operating systems did ship with source code though.
Long before universities, software was distributed among user groups. The largest ones were SHARE (for IBM mainframes) and DECUS (for Digital Equipment a.k.a. DEC minicomputers). They used to distribute lots of software among group members; DECUS for example started sending tapes with "free" software (meaning freely distributable, licensed to members of the group) in the late 60s or early 70s. Among IBM mainframe users the sharing was even more intense; they would take large parts of the installed base (including OS changes, like major changes to the batch system) and share it among each other.